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Alok Mohindra

Chapter 2

Essays, Product5 min read

Why I love great products and what makes a great product great

I love it when a product comes together in perfect harmony with the needs of a happy and engaged user. It is so rare and so magical an event that I can only call it a unicorn product or service.

I have been fortunate enough to see enough unicorn products to identify the signs. For one example, in three parts, take Netflix - the little video subscription service that could.

Three Unicorns in a row: The three incarnations Netflix subscriptions and how they won their markets

Netflix is a unicorn subscription service that seems to have nine lives and is currently on its third incarnation of a unicorn service.

Netflix v1.0 - DVD by mail

In it's first incarnation, Netflix was a DVD-by-mail service competing in a time of slow internet, Blockbuster rental outlets but no Redboc kiosks, and too few movie choices at any budget. This service, created in response to the pain of DVD late fees, promised the unheard of: "Unlimited movie rentals from a huge selection with no late fees, ever. All for $20/month - a great deal at the time".

It is difficult to appreciate how revolutionary a service this was and how incredibly quickly and efficiently Netflix was adopted by every home in America. Looking back through the company's history of SEC filings tells the story of a ground-breaking company well before it was recognize by the analyst or investment communities.

Some excerpts from the company's S-1 published 2000-04-18:

  • We have created an authoritative online source for movie recommendations and selection based on personal preferences.
  • We collect preference data from our users through our Personal Movie Finder service to provide personalized movie recommendations.
  • Since February 2000, our Personal Movie Finder service has collected over 8.9 million ratings from over 132,000 individual users.
  • At our Web site, www.netflix.com, users can rent DVDs through our Unlimited Rental subscription service, purchase DVDs through our e-commerce referral program and choose theater locations and showtimes.
  • We operate one of the stickiest sites on the Internet. According to Media Metrix, during February 2000 visitors to our Web site spent an average of 40 minutes on our Web site and viewed an average of 46 pages in a month.
  • The primary accelerant for the growth of our Personal Movie Finder database has been the ratings collected from subscribers to our Unlimited Rental service.
  • Our subscription service offers an unlimited number of DVD rentals with no due dates or late fees, for between $15.95 and $19.95 per month.
  • Users are allowed to have up to four movies out at the same time to ensure convenient selection at home. As of March 31, 2000, we had over 120,000 paying subscribers to our Unlimited Rental service.

Here Netflix is building up a business model in terms that the investment community can understand. They begin by establishing their core intellectual property asset to justify their technology multiple - a.k.a. How Netflix plans to use technology to gain outsized advantage in the competitive marketplace.

  • We have created an authoritative online source for movie recommendations and selection based on personal preferences.

  • We collect preference data from our users through our Personal Movie Finder service to provide personalized movie recommendations.

    • Netflix understood that their core digital information asset was the knowledge of the personal preferences of their users.
  • Since February 2000, our Personal Movie Finder service has collected over 8.9 million ratings from over 132,000 individual users.

    • Later in the prospectus Netflix goes on to say that one of their core monetization strategies going forward would likely be leveraging their core audience preference data by sharing it with studios to uncover undermarketed titles based on audience taste.

    While it's easy to look back with 20/20 hindsight and see that working with the major studios would never be a viable strategy for Netflix, at the time things looked different.

    What a difference scale makes

    Remember that at the time of it's IPO Netflix was but a pipsqueak in the eyes of the movie industry. Analysts loved to laugh at the audacity of the tiny Netflix to dare challenge the great Blockbuster, and in terms of total revenue the critics were mostly justified - Blockbuster generated consistent blockbuster revenues and no one could question that. Except Netflix did. They developed a pure-play disruptive business model designed to go after the edges of Blockbuster's customer base carving off the most loyal and most lucrative segment of movie watchers.

    All you can watch movies with no late fees and no due dates

    Netflix v1.0 offered a value proposition where for about $18/month a household could rent up to 4 DVDs at a time, returning watched movies in the mail to be replaced by upcoming movies in their watch queue. For a fixed price, Netflix would offer an unlimited subscription with no late fees or due dates. Instead movies were throttled based on frequency of returns. An avid movie watcher could theoretically watch 3 movies a night and return them the next day for a high-usage buffet experience. A more average household might return 3 movies a week and still be satisfied since everyone had a chance to watch the movies.

    sidebar: This Netflix v1.0 service inspired me personally to technology powered entrepreneurship and I have a story to tell (another day) about my first consulting engagement working for Netflix as an MBA student and how it affected my perspective on the world.

Bye Bye Late Fees

The revolution caused by Netflix' business model cannot be over-emphasized. By targeting frequent DVD watchers, Netflix went directly for the most avid movie watchers. By eliminating late fees Netflix turned customers away from Blockbuster at an alarming rate. Blockbuster, addicted to the late fees, mistakenly considered the users with the most late fees to be their best customers, when in fact those customers hated Blockbuster and the dreaded late fees more than life itself.

Wait there's more

While Netflix could never quite deliver the in-store retail experience that Blockbuster offered, they could move the needle on in-home delivery to the point where it didn't really matter.

They could also offer something that no Blockbuster retail store could compete with on any terms: enormous selection. With Netflix DVD-by-mail service subscribers had access to 10's of thousands of DVD titles as compared with 2-3 thousand max at a large Blockbuster. As the service grew so did their selection. It reached a point where almost anything released in the US was available on Netflix (100,000 titles). Cinefiles delighted at the promise of access to DVD quality versions of any movie ever created.


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